When he recently announced a rights issue and dividend suspension Jonathan Lewis, CEO of Capita, said the company had in the past placed “too much emphasis on acquisitions to drive growth”. Last month Micro Focus announced poor results in part because of the disappointing effect of its acquisition of Hewlett Packard Enterprises's software business. And in the US one of the worst performing major stocks recently has been General Electric, which has a long history of acquiring other businesses. All these events should remind investors that we must be much more sceptical about the benefits of takeovers.
These unhappy episodes are consistent with the general track record. “The buyer in M&A transactions must prepare to be disappointed. The distribution of announcement returns is wide and the mean is close to zero” wrote Robert Bruner of the University of Virginia in one survey of the evidence. “The outcomes of most transactions are hardly consistent with optimistic expectations. Synergies, efficiencies, and value-creating growth seem hard to obtain.” And Espen Eckbo of Tuck School of Business in New Hampshire has found that merged companies “on average underperform” comparable to companies that do not merge*.
Granted there’s some uncertainty about this, because we can never know for sure how companies would have performed had they not taken others over. But we do know that takeovers can occasionally be truly catastrophic: think of RBS’s purchase of ABN Amro or Lloyds of HBOS.